The Latest Ideas on What Happens If the Debt Ceiling Isn't Raised

By Elspeth Reeve

You might have noticed the negotiations between President Barack Obama and House Republicans to raise the federal debt ceiling have not been going so well. Despite a very public awkward side-hug between Speaker John Boehner and Majority Leader Eric Cantor--the latter wants the former's job--and talking-points discipline from both sides Thursday that the latest talks were "cordial," the possibility that Congress will blow the deadline is real. Rank-and-file Republicans don't like Senate Majority Leader Mitch McConnell's Plan B, which would require a two-thirds majority to disapprove of Obama's request to raise the debt limit. And the White House is insisting on some ways to raise revenue by closing loopholes or raising taxes on the rich and corporations, which Tea Party-backed lawmakers hate. So what happens if Washington can't get it done by August 2? Bad things.

From Aug. 3-31, the government would have to reduce spending by $134 billion. That is to say, it would pull $134 billion out of the economy in just 29 days--more than 10 percent of monthly GDP.

The economic effects at a time of 9 percent unemployment would be catastrophic, even if the bond market did not demand higher interest rates on Treasury debt--which it very likely would.

If the government paid bondholders their $29 billion first, that leaves about $143 billion but to pay bills totaling $277 billion. Which means Treasury would have to rank priorities.

Let's say Obama paid Social Security, unemployment, and veteran's benefits, met the military payroll, and kept the courts and the FBI running. Those programs alone would take up about $70 billion, leaving only $73 billion to run the rest of government.

With those remaining funds, Washington would have to make some exceedingly unpleasant choices: It could pay doctors, hospitals, nursing homes, and home health agencies what it owed for Medicare and Medicaid services, but that would cost $50 billion and leave just $23 billion to pay all other bills--everybody from defense contractors to senior day care center operators to disaster relief.

Bloomberg Government offers a handy tool that lets you decide what services to fund first and which to let go hungry. This is a pretty fun game where you try your hand at fantasy policy making--though, sorry stoners, Bloomberg won't let you end the Drug War by defunding the DEA. You'd have to spike the whole Justice Department budget of $1.4 billion. Other fun options? You can imagine stiffing military contractors on their $31.7 billion--maybe that will discourage them from tricking Figian cosmetologists into cutting hair in a war zone for a couple hundred bucks a month.

Bloomberg's David Rapp talked to Jay Powell, undersecretary of the Treasury for Finance under President George H.W. Bush, who says the details might be a bit more complicated. "Powell's research also shows that the daily cash-flow outlook would be just as difficult to manage," Rapp writes. "For example, if the cash shortage begins on Aug. 3, as projected by Treasury, the government may find itself unable to make a $23 billion Social Security payment due to go out that day."

CNNMoney's Jeanne Sahadi looks at what might happen if Treasury is unable to prioritize bondholders. In short: global disaster.